According to Wikipedia, Puerto Rico is over $70 billion in debt. $70 billion’s not chicken feed. But, on the other hand, under Quantitative Easing 3 (QE3), the Federal Reserve was handing out $80 billion per month to stimulate the U.S. economy. Surely, the Fed could cough up enough to solve P.R.s debt problem—right?

I doubt that Puerto Rico’s $70 billion debt is a domino that’s big enough to start a chain reaction that will, eventually, topple the US economy. If I’m wrong, why doesn’t the Fed simply lend Puerto Rico, say, $40 billion, to placate some of its creditors and at least kick the can down the road for another year or two? We could call it “QE4”—a one lump loan of $40 billion to save Puerto Rico.

However, even if Puerto Rico’s debt problem is more noise than news, Puerto Rico’s tactics for dealing with that problem might be illuminating.

Why? Because there are only so many moves on the board. I.e., there are only a limited number of tactics that any insolvent government can use to deal with its excess debt.

By understanding Puerto Rico’s tactics for dealing with its unpayable debts, we can gain a pretty good idea of the tactics available to any other overly-indebted nation (including the U.S.) when it’s finally forced to default.

Financial and economic news increasingly report on the term “liquidity” and its antonyms “low liquidity” and “illiquidity”.

For example, Business Insider (“This week’s gold crash reminds us of a much scarier risk in the markets”) warned that on Monday, July 20th,

“. . . gold crashed by more than 3% in just a matter of seconds. . . . [E]xperts are still trying to come to a consensus over the cause of the stunning move. . . . But all of these theories are more or less tied to one theme . . .: low liquidity. . . .

“Current concerns in the financial markets center around the absence of liquidity and the effect it might have on future market prices,” Janus’ Bill Gross said in June. “In 2008/2009, markets experienced not only a Minsky moment but a liquidity implosion . . . .

“Liquidity is a concept that is universal in the markets. And sometimes it will just vanish without warning. . . .”

“Low liquidity is bad almost any way you look at it.”

OK, OK, OK—the concept of “liquidity” is “universal” and, like a magician’s assistant, it can mysteriously vanish or appear at any moment. “Low liquidity” is universally bad and therefore an “ill” liquidity—or, for short, “illiquidity”.

We get that.

And we sure don’t want another “liquidity implosion”—do we?

No.

In fact, we’re all united in our adamant opposition to “low liquidity”—but what th’ heck is it that we’re all opposed to?